Ludwig von Mises Institute

Chapter 11
On the Nature of Commercial Value

I propose to offer some remarks upon the nature and influence of commercial value, with especial reference to the term "measure of value," so frequently employed in economical science. The theory of this term, as commonly understood, I conceive to be the source of more practical mischief than any other theory of science.

There is no common standard or measure of value, nor can there be any, for the reason that no commodity can be found to represent value that is not liable itself to variation in supply and demand, and consequent fluctuation in value. Value is in its nature relative, involving a comparison between two or more things in respect to the labor, skill, and capital applied to put them in form or position to satisfy some want or desire, and also in respect to the supply of and demand for them; the value of each being in the compound ratio of its utility and its scarcity. Value is reciprocal between money on one side, and all other property on the other side, as well as between different properties, and is necessarily fluctuating. It can never be fixed and absolute, but must vary continually with the demand and supply of all exchangeable things, gold and silver included, whether coined or uncoined.

If an ounce of gold, whether in coin or bullion, will exchange for a barrel of beef, then an ounce of gold is worth a barrel of beef, as a barrel of beef is worth an ounce of gold. If at the same time a barrel of beef will exchange for 100 pounds of copper, then an ounce of gold or a barrel of beef is worth 100 pounds of copper, and conversely the copper expresses the value of the beef and the gold. This law applies to all the commodities of trade, either being the measure of value of the others, each and all fluctuating in value with the variations of supply and demand. Gold has no peculiar efficacy in this respect, it being itself a commodity subject to the law of value like every other commodity; it is cheap when plenty and dear when scarce.

Money, or the dollar, therefore, is not a measure of value more than anything else, labor included; indeed, labor is the more certain and permanent standard of the two. Money is, by the custom and for the convenience of all nations, the medium of exchange, by reason of which it becomes the price of things, and, to secure equity, and facilitate compliance with commercial obligations, it is by nearly all commercial nations made a tender for the payment of debt, but this adds no permanence to its value.

An ounce of gold is as perfect a price as a dollar of gold; the former is a quantity of 480 grains, the latter of 25 8/10 grains. Both are mere quantities of a certain commodity bartered like every other commodity, according to its exchange value in market. The government, by the mint law, do nothing to determine its value—they merely establish its quality at nine-tenths fine, and provide convenient coin for the medium of exchange. More dollars will cheapen dollars, as more apples will cheapen apples. Gold, having the same use, would possess the same value without regard to the mint law. It must, however, be understood that money forms one of the principal uses of the precious metals, and they necessarily owe to that use the corresponding portion of their value, which has been estimated by the economists at two-fifths. If, then, their employment for currency were to be abandoned, their value would fall two-fifths, in the average, and no more; it would then require an ounce of gold to exchange for the property which can be had now for three-fifths of an ounce.

All we can say of value, therefore, is indefinite; it is that money is cheap when and where commodities are dear, and commodities are cheap when and where money is dear. The relative value of money here and elsewhere can be determined only by the comparative average price of commodities. An increase of commodities thrown upon the market, without a corresponding increase of money, will always enhance the value of money by creating an additional demand for it; less money will then buy more of commodities; that is, their price falls. An increased amount of money thrown upon the market, without a corresponding increase of commodities, will always enhance the price of commodities; more money must be given for them, because its relative value falls.

Now, the difficulty in this matter lies in mistaking price for value—they are widely different things. Value is the power of property and labor to exchange for other property and labor, and may remain the same under the most extreme alteration of price. If we double the supply of money upon the market, other things remaining in supply and demand as before, the prices of all property will double in the average. In this case money falls in value one-half—two ounces of gold must be given in exchange for commodities which could have been obtained before for one ounce; there is no alteration in the value of other things, because their relation to each other remains unaltered; they exchange for precisely the same quantities of each other as before; the alteration is wholly in the value of money itself.

Price is the power of property and labor to exchange for money only. Obviously, therefore, if any commodity becomes scarce in relation to the demand, either by a falling off in the supply, or by an increase of demand, its power to exchange for money increases in proportion; its price rises accordingly. Allowance must be made for commodities that admit of substitution; thus, wheat, for example, might fall off in supply one-half, and the consequent rise of price would probably turn the consumption to a great extent upon Indian corn, rye, rice, &c, which would rise in price and value also, and we must estimate an average rise of value on the whole supply of cereals; still the general rule holds good; if at any period an ounce of gold and 100 pounds of copper were equivalent values, and the supply of copper in proportion to the demand should subsequently diminish one-half, we must then expect to give two ounces of gold instead of one for 100 pounds of copper. This is a rise in the value of copper, because its relation to other commodities is changed, and it is a rise in price, because it is an alteration in relation to money likewise; but, as I have before stated, if the same disproportion between money and copper should be caused by a double supply of money, we must still give two ounces of gold, instead of one as before, for 100 pounds of copper—the cause is different—the effect the same. Copper would rise in price 100 per cent without any rise of its value, while gold would depreciate in value one-half, or 50 per cent. This double supply of money increases the price of all other commodities in the same ratio—100 per cent—for a fall in the value of money is only another mode of expressing a general or average rise of prices.

Here let us clear away an obstruction to the proper understanding of this matter, namely, the notion that the rate of interest expresses the value of money; nothing can be farther from the truth. So far as interest expresses anything in relation to money it is the opposite of its value, for it happens, all the world over, that when and where the rate of interest is high, the value of money is low. Everyone whose attention is called to the subject will observe that money—real money—always runs away from countries and districts where interest is high to those where interest is low. Following the law of value, money flows from the cheap to the dear market, like every other commodity. Thus it leaves California, where interest is 24 to 30 per cent per annum, for New York where it is 6 to 9 per cent, and leaves New York for London, where it is 3 to 4 per cent, and London for Hamburg, where it is 2 per cent, and so on, running always counter to the rate of interest.

I have been surprised that the plain contradiction of the common notion of the value of money expressed in this fact has not attracted public attention. I think I have never heard or seen any public mention of it, except once in the sermon of a philosophic preacher.

J. Stuart Mill speaks of the 'Value of money" when used to denote the rate of interest, or the rate of interest to denote the value of money, as a misapplication of terms; and takes much pains to show "how great an error it is to imagine that the rate of interest bears any necessary relation to the quantity or value of the money in circulation." While agreeing with him as to the misapplication of terms, I differ from him in regard to the relation between the rate of interest and the value of money. A high rate of interest and low value of money would not accompany each other so constantly by mere accident; there is a relation between them, but in the inverse ratio; thus, whenever money or the currency is cheap or expanded in volume, general prices are high—dear prices and cheap money are synonymous terms. Now look at California; she can neither eat, drink, nor wear her gold—its value to her is almost entirely for export; she must sell it, and this she cannot do without sustaining the price of commodities above their average elsewhere. No one sends merchandise intentionally from New York to California, when he can obtain as much gold, that is, as much price, for it in New York. California must buy her imported commodities at the high prices resulting from cheap gold. In this respect California is like a foreign country to the Atlantic States; we buy her gold as we do the gold of Russia or Australia, with our commodities—our commodities are her imports. The high prices and the general appetite for gold throw a constant excess of imported merchandise upon the California market, and must continue to do so while gold is a native production that she must sell. She will have more foreign commodities than are necessary for her consumption; the high prices for surplus merchandise are a constant motive to speculation; commodities are forced upon the market at a tempting difference below the regular selling price to consumers; the surplus merchandise is advanced upon by commission merchants in acceptances that are discounted by bankers; it is sold and resold by and to speculators for notes that are also discounted; finally, no people in the world are more involved in debt abroad and among each other, in proportion to capital, than the people of California. Nearly all the gold they can raise comes away, leaving them in debt besides. Cheap as it is, and must be, naturally, they cheapen it still more by using bankers' credits, convertible on demand, as equivalent in value to gold and silver, thus adding to the real dollars of their currency fictitious dollars of debt; so they part with their money and do business with debt. It is debt that creates the hungriest demand for money—the most pressing necessity for loans—and it is therefore debt, in relation to capital, that determines the rent of capital or rate of interest. Nowhere else is debt so great in proportion to capital as in California, and consequently, nowhere else is credit so precarious and the rate of interest so high. The element of risk enters into the rate of interest everywhere, and, in spite of the usury laws, it must be paid for.

Such is the nature of a cheap currency, whether from the native abundance of gold and silver, or from the volume of bank notes and credits; it is always accompanied by debt, instability, and a high rate of interest. Wherever gold and silver are cheapest they will be sought and found by numerous customers, and bought with all the commodities of the world, while that cheapness remains. When their supply becomes so far exhausted as to raise their value above merchandise, that is, when the prices of merchandise fall below the value of gold and silver, and it becomes a losing business to exchange merchandise for them, the business stops of course, but this never happens in a gold-producing country without a financial revulsion. Such is the attractive power of gold, and so powerful the impulse by which commodities rush to it from points near and distant in every direction, and so great is its tendency to sustain prices, that the inflowing stream is seldom checked, and the market of the gold country never fairly yields, until it breaks down altogether under a glut of merchandise in a general stampede of prices, followed by widespread bankruptcy and distress.

I think we may predict with tolerable certainty that California will never enjoy more than three or four years consecutively of prosperous or even comfortable business while her present abundant gold production continues, and especially while she continues to add to the dollars of her natural currency the fictitious dollars of bankers' debt, inscribed in credits, for more than the gold they receive on deposit; for the effect of these credits, in excess of the deposits, in reducing the exchange value of gold, is precisely like the addition of so much gold itself.

It follows that a community gains nothing by mining gold and silver; it is labor lost, excepting so far as it supplies plate, trinkets, and other ornamental trifles in exchange for other things—a very doubtful advantage. That country thrives the most which buys the precious metals with the proceeds of its labor bestowed upon the widest and best cultivation of its soil, and upon branches of industry natural to its condition, which promote health, and a vigorous and intelligent population. That people are the most prosperous and happy who keep the precious metals valuable in comparison with other commodities, by the most extended use, and by a constant relative increase of commodities, to secure the sale of commodities and keep a constant demand for labor to replace them. Every ounce or dollar of gold thus obtained is a gain of capital; the operation is selling goods for money, opposed to debt; it increases production, secures a steady export trade, employs navigation, and adds to the nation's wealth.

It is a mistaken policy for any community to increase its currency, except from the absolute necessity of importing the precious metals in payment for balances from abroad which cannot otherwise be remitted; for the increased volume of currency increases prices without increasing values, the real effect being a fall in the value of gold and silver, and the inevitable consequence is a decline of the exports and increase of the imports of merchandise, the imports coming more or less in competition with home industry. This result follows the home production of gold; but the most suicidal policy is to increase the currency in convertible "promises to pay," which substitute debt for money, having all the injurious effect of degrading the value of the currency, with the additional evil of increasing the obligations of debt in fictitious values, which, on the demand of real dollars, cannot be paid. Bankruptcy is the result, as we witness in every contraction of bank loans.